You bet there are, and I’ll get into what real estate investors need to know shortly, but first, let’s look at the following.
We follow the US and Canadian real estate markets closely. Real real estate is a very slow moving asset, and it’s not always so exciting. When we get our monthly rental checks every month, it’s almost as boring as watching the paint dry.
However, any savvy investor knows that consistent, lasting wealth is built over time and pays huge dividends down the road. This means that in 10 to 20 years, rental properties will be paid off by tenants. Home values will be 1-4 times more valuable and will provide cash/income for life.
I invest in real estate and I think it is one of the best long-term investments, beating the stock market when risk/volatility is taken into account. But there are times when buying real estate isn’t so good, and 2022 is one of those years.
In one month, real estate fell by 14.7% in certain regions of Canada and the United States. In fact, the IYR real estate ETF also fell by 15%, which confirms this over the same period.
Here are some proofs of the city where Technical Traders Ltd is based.
My question is, do you think it’s wise to pay record prices for a property or wait for another 15-25% correction before investing in a new home or rental property?
Overview of investment in 2022
The US stock market contracted sharply in early 2022 as traders tried to identify the risks associated with the US Fed’s rate hike. Behind the scenes, real estate investors and landlords are under pressure due to rising costs on almost everything. Gasoline, food, everyday items, interest payments on credit cards – almost everything costs more due to inflation and rising fuel prices.
I remember back in 2007-2008 when oil hit levels above $140 ppb and the seemingly high costs of everything just before inflation peaked and markets turned bearish. Then, just as now, a period of extreme speculation seemed to permeate buyers and investors across the United States.
What broke this trend was the global financial crisis. When the economy started to deteriorate, excessive credit/debt levels suddenly became unmanageable for almost everyone. What seemed like a reasonable and manageable amount of debt suddenly became excessive when the US Fed raised the federal funds rate from 1.0% to 5.5%, a 450% increase.
Recently, we have seen the US Federal Reserve raise rates from 0.25% to 1.0%. The Fed could raise rates again soon, trying to control inflation. I don’t have a crystal ball, but it’s not hard to see how inflation, rising consumer costs and rising debt service charges are going to panic many real estate investors, especially after many years of ZIRP and low inflation.
Property investors and owners weighed down by rising costs and falling revenues
American investors are struggling to manage their finances as inflation and the rising cost of living continue to eat away at their extra cash. Remember that what happens at the consumer/retail level is often the “canary in the coal mine” type of scenario tied to broader economic trends. As consumers change their spending habits, news quickly spreads to other consumers about how economic conditions are threatening their future.
The extreme measures taken when COVID-19 hit in February 2020 helped many real estate investors and owners, as well as consumers survive the extreme economic contraction that took place. Now that we’re beyond the extreme measures, prices have risen over 25% in the past 24+ months for almost everything. Investors are struggling to manage their monthly expenses while trying to enjoy their lifestyle.
A recent article spotlighting former Federal Reserve Chairman Ben Bernanke suggests that the current US Fed has waited too long to resolve inflation issues. The measures now needed to control inflation could be very painful in the future. I see this as a very clear warning to traders/investors to keep their assets highly liquid and reduce their exposure to risk factors.
New mortgage demand plummets as most property investors are barred from buying homes
The sharp decline in demand for mortgages is indicative of a collapse in consumer confidence and willingness to believe that the economy will continue to grow. Warnings from the US Fed, along with signs that international market conditions are rapidly deteriorating, are worrying US consumers and homeowners – watching for the next drop in real estate and house prices (again).
Application for mortgage loans for real estate investment
US Fed targets rate hike of over 1100% over 4 months – fastest in recent history
The US Federal Reserve continued to suggest further rate hikes are needed to help bring current inflation trends under control. By many conservative estimates, the US Fed is targeting levels at or above 2.0%. These extremely aggressive targets would represent the fastest and potentially largest percentage rate increase in recent history.
If the US Fed then raised interest rates by 0.50%, that would represent a rate hike of 1100% and more in just 90 days. Rates soon increasing to 2.0% or more, will represent an increase of 1500% and more over 4 to 5 months and more.
Source: St. Louis Fed
An extreme post-COVID speculative wave can have extreme consequences
Inflation and many other economic issues are suddenly front and center for central banks and real estate investors around the world. The news that house price levels in China continue to decline could be a very clear sign that China/Asia has peaked ahead of the US and other global markets. We have never seen anything like the sharp rise in global house prices except for a brief period from 2004 to 2008 (see chart below).
Investment house prices
Source: St. Louis Fed
This rally ended with the global financial crisis. Home prices are down almost -20% from the high in the first quarter of 2007 to the low in the first quarter of 2009. If history repeats itself, home prices in the United States will fall by more than – 20% to -25% for real estate investors, because history tends to repeat itself.
US stock market may not follow lower asset prices as economy evolves
I want to urge you to think about how capital works in a changing global market environment. Capital is always looking for the best, most opportunistic instruments for future gains and risk protection. Even when markets were turning lower in 2009, a bottom was set in the US stock market long before other assets bottomed out in price. This same type of scenario could unfold over the next 12 to 24 months.
If my interpretation of market conditions is correct and the US Fed attempts to raise rates further to dampen inflationary tendencies, it is likely that various asset classes, including real estate, ETFs and individual sectors, will reverse risks (as we are seeing now) and will perhaps turn into future opportunities. What was overvalued in the past can turn into an incredible opportunity as capital moves into sectors/trends with opportunities for future return on investment.
Current market trends will present incredible opportunities for traders/investors who are able to protect their capital, see and understand the risks and opportunities that arise, and properly plan their investments/trades in the markets.
In today’s market environment, it is imperative to assess your trading plan, portfolio holdings and cash reserves. Experienced traders know their downside risk and adapt if necessary. Successful traders manage risk by using stop-loss orders, rebalancing existing positions, reducing portfolio holdings, liquidating investments, and moving into cash.
Managing risk and expectations for real estate and stock market investments is key to long-term success. Do this and you’ll avoid the roller coaster of doing nothing to protect your investments.
The successful management of our direct debits guarantees our commercial success. The bigger the loss, the harder it will be to make up for it. Consider the following:
- A 10% loss requires an 11% gain to recover
- 50% loss requires 100% gain to recover
- A 60% loss requires an even more daunting 150% gain just to break even.
Recovery time also varies considerably depending on the magnitude of the drawdown. A 10% drawdown can usually be recouped within weeks or months, while a 50% drawdown can take years to recover.
Depending on a trader’s age, he may not have time to wait for recovery or patience. Therefore, successful traders know that it is essential to keep their withdrawals within reasonable limits. Most of them learned this principle the hard way.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.